Corpus Christi sinks bond-financed desalination project

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The Corpus Christi City Council this week halted plans for a desalination facility, citing escalating costs and raising concerns about bonds that were sold so far for the project. 

A measure authorizing design-build contractor Kiewit Corp. to complete more of the design work for the Inner Harbor Water Treatment Campus, which would be the first seawater desalination plant for municipal use in Texas, was defeated in a 3-6 council vote. 

The move effectively ends the project, according to a statement from the city on Friday.

The vote came after the council paused the project in the wake of a nearly $1.2 billion cost estimate Kiewit produced in July based on 10% of completed design. A previous estimate pegged the cost at $757 million, which was up from an earlier estimate of $220 million.

"I just can't wrap my head around $1.2 billion," Council Member Eric Cantu said, noting the Texas Water Development Board's commitment for bond-financed low-interest loans for the project only totals $757 million and saying refineries that would be big consumers of the treated water haven't stepped up to help pay for the project. 

Triple-A-rated TWDB sold a total of $232 million of bonds for the project through its State Water Implementation Fund for Texas program, according to a Corpus Christi staff memo on a resolution for an additional $210 million of utility system revenue bonds for the desalination project that would be included in an October TWDB debt issue. 

The city council passed an amended resolution directing staff to ask TWDB to extend the $210 million loan agreement with the intent to repurpose proceeds for other approved water supply projects.

As for the outstanding bonds sold by the TWDB for the desalination project, the city remains on the hook for paying debt service until the bonds can be called, according to the staff memo. 

"At the 10-year call date, the city would pay back the unspent funding or defease the bonds," the memo said. "Canceling the project now would cost the city approximately $122.5 million over the next 10 years in interest payments plus the (approximately $50 million in) principal already spent."

The city's financial advisor, Victor Quiroga, a managing director at Specialized Public Finance, told the council that proceeds from outstanding tax-exempt bonds must be spent within a reasonable time period or face the risk of being converted into taxable debt. He added that the situation is complicated by the fact that the TWDB issued the bonds.

"There could be federal tax implications and possibly state implications, but I just don't know what that is because this is uncharted territory," he said.

Corpus Christi Water, which is the primary water supplier for a seven-county region, expected the desalination plant to produce up to 36 million gallons of potable water daily. The area is experiencing stage three drought conditions that triggered water-use restrictions.